Introduction to Share Trading Part-II

Posted on October 27, 2009
Filed Under Business & Finance |

In the previous part, I had discussed about the basics of Share Trading. I had covered “intraday” and “long term investments”. In this post, I am going to tell you about future trading. The name itself looks quite interesting, as there is the word ‘Future’ associated with it. In this type of trading, as the name suggests people predict about future. Basically, future & options are derivatives. Derivatives are nothing but a type of financial instrument. Simply put, F&O is an agreement between two parties that mutually agree to buy/sell a fixed quantity of a product on an agreed future date.

Let me elaborate on this, taking an example. Suppose I think that State Bank Of India’s fundamentals are very good and it’s share price is going to increase in near terms, so I decide to purchase a contract of State Bank Of India(SBI). At the same time, someone else might think that SBI’s fundamentals are not up to the mark, and he decides to sell SBI’s contract. So the deal is st up between me and the other person. This future trading has 3 types of expiry, one is current month, next month and the month following the next month. And all expiry is on last thrusday of that month. Now so lets talk about SBI deal, the deal is as follows:

I have bought 132 shares (contract size, this is fixed.You need to purchase or sell in multiples of this contract size) at Rs. 2200 and expiry is next month (November), i.e the other person has sold it for Rs. 2200. Though, the total amount would be, 2200*132=Rs. 290400. But both the parties need to pay only a margin amount. If 20% is the margin amount, that equates to Rs. 58080. So, both the parties will deposit Rs. 58080 each. Now, if the price goes to Rs. 2250,the next day, then my account will be credited Rs. 50*132 (the increased amount*No. of shares)= Rs. 6600, and other person’s account will be debited Rs. 6600, and reverse happens if the price goes down, i.e my account will be debited and his account will be credited. This process continues till the expiry. If, before the margin date, a day comes, when either mine or the other person’s account’s balance has reduced to minimum margin amount, extra money is required to be deposited or else the contract shall expire. A minimum mrgin amount is required to be maintained in the account or else the contract shall expire. However, if any party wants to end up the contract, then he can withdraw.

The alluring part, that makes people think that they will earn a lot by doing future trading, is that they need to pay only a small marginal amount for large number of shares. There is no doubt about it that people earn quite a lot a lot in future trading, but not every body earns. So my advice would be, if you are planning to trade in future, better think of it wisely and take decisions. The best way is to read all the related news about that stocks, do some research, think wisely and then only take risks.